Last week UBS hosted an open-house session for journalists during which Matthew Hanning, head of investment banking for Asia, rolled out some proprietary charts that backed up what we all intuitively think is true. Asia is where it’s at. Equities are key. And China is essential.
Sure, you knew that already – but the data backing it up makes it easier to argue that you need more equities bankers in China, right now. And it goes a long way to explaining the tug-of-war over top talent in the industry.
Hanning started out with the obvious evidence for why we all want to be here now: a chart of worldwide gross domestic product growth. Asia’s 2011 estimated GDP growth is 7.5%, as opposed to the eurozone’s 2%, a growth forecast of 2.7% for the US and the global estimate of 3.9%.
That is to be expected. Asia is growing off a low base and the US and Europe are mature economies, albeit with some immature, if not down-right silly, economic woes. (Think of how the US got into its housing troubles and you conjure up a teenager with his dad’s credit card.) But the old slam on Asia was that this wasn’t where the fees were at. You should ditch that view now.
Hanning pointed out that between 2008 and 2010 the global fee pool remained static year to year — indeed, in 2009, during the height of the financial crisis, it was actually down 4%. Asia, by contrast, was up 85%. Low base or not, you can’t ignore this region.
And, once here, what do you hone in on? The equity capital markets. “This market is unashamedly an ECM-dominated market,” said Hanning, who didn’t need to point out that UBS has had a strong focus on the equities market in Asia for some time.
His breakdown of investment banking transactions in 2010 looked like this: 69% ECM, 29% M&A and 2% debt capital markets. That’s not all that changed from 2006, when the market breakdown was: 63% ECM, 28% M&A and 9% DCM.
But what is changing is the growing importance of China. In 2006, 41% of the deals came from the Greater China area; last year that was up to 58%.
“It is definitely China that is providing the lion’s share of opportunities for investment banking,” said Hanning, who pointed out that you need to be in the A-share market as well — a convenient note because UBS is licensed to do this.(For more on investment banking in China, see the March cover story of FinanceAsia magazine.)
However, before you start drooling, bear in mind that the fee pie is increasingly being divvied up among more hungry participants. The average number of bookrunners has increased since 2005, leading to greater competition for market share. Last year, there were on average 5.4 bookrunners for the $1 billion-plus initial public offerings in Asia. (While we know this is a mathematical breakdown, one can’t help but giggle and think: did the 0.4 bookrunner just carry the charts to the pitch room?) By contrast, in 2005 there were 2.8 bookrunners for every $1 billion IPO in the region.
“Issuers aren’t paying less,” said Hanning. “It’s just getting distributed among more banks.”
As for the 2011 pipeline, Hanning said “revenues this year will be robust”. He forecasts about $105 billion of new issuance this year, excluding the A-share market. That’s as compared with 2010’s $94 billion of issuance, which includes Agricultural Bank of China’s $22 billion IP0 and AIA’s $20 billion IPO. If you subtract the two mega deals from last year, 2009 looked a lot like 2006 and 2007, which boasted $65.9 billion and $73.3 billion in IPOs respectively. But here’s the difference — the number of deals has grown exponentially. In 2006 there were only 166 deals; last year there were 259 IPOs (roughly one for every day the markets were open). Hanning said you can expect the number of deals to remain high as more mainland companies grow and are ready to come to market.
When he opened the presentation to the floor, the first question was about how the multinationals would fare against mainland banks in the competition for business in China where guanxi, or networks of influence, matters. Hanning noted there was enough room for all — most deals would continue to have at least one multinational bank on them, not just for expertise but also for distribution and relationships with investors abroad.
“I might be best friends with my neighbour but if I need heart surgery I probably won’t ring him up and ask for help unless he’s a world-class surgeon,” said Hanning. “There’s room for more than one bank in a syndicate. Chinese banks bring more to the table than just relationships and clients would be wrong not to bring the local banks to the table.”
But there’s room for the multinationals as well.